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Sunday, 7 August 2016

How to acquire a bunch of IP from a dying company


Why should you acquire IP?

People acquire IP to do what they like with it. The important part is that you think it's worth it and that you can get benefit out of owning the IP. If it's just an exercise in vanity, then forget about acquiring IP. But if you think you can turn the IP into money, then you can consider going all out to get IP.

Why a dying company?

Because a dying company is in dire straits, and its owners will want to raise funds as soon as possible. And because the directors may be worried shitless about getting sued for their business debts. And also because when the company is wound up, and the assets of the company are sold to raise funds, the IP may be sold at a price much, much lower than what you could offer to the company owners.

They are dying. So help them die less painfully. 

This is a great quote. But for the purposes of this article, let me say that I am only concerned with carrying away the IP from a dying company. You could make a tidy profit out of IP, if you know how.

Dying companies appear to you in different ways. Like my pastor once said, you never know if the poor person who knocks at your door is an angel in disguise. Likewise, some companies appear rich and prosperous, but a company search could reveal that it is dormant, without any returns ever being reported. Perhaps they have lodged their accounts for the past year, and it's a loss. Perhaps their boss is trying to raise funds because their business model doesn't work well in the tanking economy. Perhaps they have shareholder tussles, and the business owners just want to wind it up and move on with their lives. Perhaps they have the income tax breathing down their necks for tax that they did not pay.

It doesn't matter what the company looks like. But it matters what their IP portfolio looks like.


IP that you could look at

So you are a smart cookie and you've decided that you want to exploit IP for profits. In that case, read on. But if you feel reviled by the prospect of turning into a vulture of sorts, then move along. There's a bunch of vultures circling overhead, waiting for the company to breath its last.

You should look for these sort of things.

Brands.

These take the form of a trademark, or a business name. With it comes goodwill, just not the type they tell you about at Christmas. Instead, it's business goodwill, i.e. brand recognition and a bunch of loyal customers who look at the brand and their eyes mist over, and they heave a happy sigh as they recall the brand from their childhood days.

Brands can be transferred to a new owner, without needing to take over the company. Or a brand could be licensed out across continents, to big players who want to experiment with something small and cosy. 

The concept of the brand came from farmers who heated up pieces of metal and placed the white-hot pieces on their cows and cattle. That way their cows and cattle (and sheep, too, perhaps) could be identified. Law enforcement officers also branded convicts in the same way so that innocent folk would be able to identify wrongdoers. In old Japan for example, convicts were tattooed. 

So take a look at the brand of the dying company and decide whether it's something that you could reset and reboot from scratch. You would get all their goodwill with none of their liabilities. In case you get sued, calmly point out that the owner of the brand was so-and-so, and not you. 

Trade marks and Service marks

These are similar to brands, but different in some way. It's like this. Think of Nestle, the food company. They own a bunch of different product lines that include Maggi, Milo, Nescafe, Dolce Vita, and so on and so forth. Nestle is the brand. Maggi, Milo, Nescafe, etc. are trade marks within their portfolio. Each of these trade marks is its own brand, but a brand is something of a persona that is built up through "brand recognition". This means that the previous owner of a trade mark must have invested heaps of money into making the trade mark popular. When that happened, it became a brand. Otherwise, it was just another trade mark. 

Take a look at the register of trade marks, and you'll see all sorts of trade marks that never made it to market. You might feel astonished, so let me explain. Some entrepreneurs hatch a business idea and decide that they want to use a certain trade mark or service mark. To prevent others from using similar trade marks, they register a trade mark first. If the business idea takes off, the trade mark becomes their brand. If not, it's left to linger in the corner and gather dust, until it expires.

Even so, expired trade marks can be revived by late renewal. It might have value to you, which others might not see. After all, beauty is in the eye of the beholder.

Patents

These are absolute bars to others producing the same item, using the same technology, but only for 20 years from the date of filing. If the patents have been passed, and published, then they are in force. In that case, if you buy these patents, you can become a manufacturer of the item that has been patented. Or you could license it to a manufacturer who wants to manufacture it, without threat of competitors. Or if you are really sneaky, you could become a patent troll and threaten all those who manufacture things that infringe your patent (or so you would claim).

If you are benevolent and generous, you could harvest these patents into a patent pool and open it up to the industry, so that they might build on top of it without threat of litigation. Think of the QR code. Think of Linux. Think of how much fame the IP owners have gotten, thanks to their role as catalysts of innovation. That fame might be worth more than the patent.

Patents could be worth a lot, and they could be worth nothing. A patented product which has become popular in the marketplace is worth a lot. Manufacturers would want to license the patent. But a patented product that is so diametrically different from anything in the market and is perceived as too weird for use, is of no use to manufacturers who do not want to educate the market. Because educating the market takes a long time, a patent licensee might not benefit from the patent. It'd be more logical to wait for the patent to expire and then start exploiting the patent.

Industrial designs

Like patents, these are bars to others producing the same design. But since it's design, and designers are good at imagining workarounds, it's very possible that someone could copy the feel of the design without copying it 100%. Nevertheless, acquiring an industrial design could be a good thing if the product is doing well in the market. You would not want to copy someone else's design and suddenly find that the product is doing very well. You would have nightmares that the original design owner might one day sue you. And of course, all business owners want to avoid being sued, or having to sue, but if you really had to choose, you'd be better off suing than being sued.

Copyrights.

These may consist of drawings, writings, films, songs, jingles, and the like. They are a part of the persona of the company, and have value due to their long life. Once the TPPA required amendments kick in, copyrights will be for the life of the author plus seventy years. If you acquire that, you have a long, long time to exploit the copyright. Think of Michael Jackson and the Beatles' catalogue. Think of the Walt Disney cartoons. Think of Philip K Dick and how he died poor, but his books became blockbuster movies. You could pick up copyrighted works and turn them into something else tomorrow.

Trade Secrets

These things are rather tricky. Many things are secret, even in the course of business. We don't usually blare to the public whatever the board of directors has decided or is considering. But certain things become very valuable. Think of the Coca-Cola recipe. Think of the Famous Amos cookies. Their recipe is a trade secret. Even though it's only food, housewives around the world who tinker in their kitchen would decline to conduct experiments to break the recipe. You can never be too sure whether it's the right recipe or not, and with food, different combinations might produce the same result.

A trade secret is worth nothing once it is divulged to the public. That's why there is a secret industry known as industry espionage. Agents of your competitors who masquerade as interns and attachment students come into your company and try to learn your secrets. That's no different from you sending people to work in a company with a trade secret. But since they are a dying company, it means that their trade secret it useless. Or it might also be that they haven't learned how to exploit it yet. If you've ever watched the Korean movie, Makgeolli Girls, you'll know what I mean. 

Checklists are hard work, but they provide a pathway to get what you want. Besides, in the heat of the moment, you may miss an important thing or two. So remember that when working through the checklist below: The harder you work, the luckier you get. You lucky fella, you.


OK, so that's that. This leads us to ...

The Checklist.

  1. The Letter of Intent (a.k.a. LOI). Send a letter of intent to the company to state your intention to acquire their IP. Say that you want to enter into discussions and/or negotiations. Wait for their response. 
  2. The Non-Disclosure Agreement (a.k.a. NDA). You'll probably get this before they start talking to you. This is to ensure that you do not divulge whatever they disclose to you to any third parties. For all they know, you might be fishing for information for a bigger corporate vulture. Or one of their competitors. In some cases, they might send you a Non-Disclosure and Non-Competition Agreement (a.k.a. NDNCA). Get your lawyer to look at it and sign off on it.
  3. The List of IP Assets. If they are truly dying, they might send you a list of what they have. They might want you to take it lock, stock and barrel. That's saying, in effect, "Could you take this whole heap over here? I'll throw in this very valuable thing if you do." 
  4. Verify the validity of their list. This means getting your lawyer to check to see whether the IP is registered, and whether they have ownership of it. In some cases, the IP is not registered. They might have to show you that they own the IP, e.g. the brand or the trade mark. 
  5. Get a valuation. Since this is only an acquisition of the IP, you'll want to get the IP valued. For trade marks and service marks, use the Interbrand method. For patents, look at how much the patent is generating, not how much it cost to patent the thing. Patents cost a lot to register, but many patents are duds. 
  6. Check patent claims. Since a strength of a patent lies in its claims, you might want a patent agent or patent attorney to evaluate whether the patent's claims could stand up in court. Some patents get passed even though they should not. Dying companies just want to dangle the patent in your face in exchange for your money. 
  7. Consider whether the IP is a fit for your business. It's like talking to your wife when she goes shopping. "Yes, it's nice, but is it you?" And so it is with your business. You're being offered a bunch of IP on the cheap. Is it aligned with your company's direction? If no, don't worry. I remember the Friendster deal that a Malaysian company snapped up some time back. They sold the Friendster patents to Facebook and recouped their costs. In the process they dismantled the Friendster social networking website and turned it into a game coupons vending site. Young people everywhere migrated to Facebook.
  8. Evalute how much it is going to cost to maintain the IP. Patents need an annual fee to continue to be valid. If a patent lapses and someone starts manufacturing the patented item, the patent holder cannot sue that person, even though the patent is later reinstated. You might as well give the patent away for free if you cannot maintain it. Better yet, don't buy. It's like talking to your kid when you visit a pet store. "Honey, it's cute, but do you think you want to feed it, wash it, train it and take it for walks?" If the answer is no, you should know what to do.
  9. Check whether the IP has been licensed out. In case you thought that you were going to acquire them and then license them out (pays for itself), think again. The dying company may have already beaten you to it. Some guy in Dubai or India may have gotten the rights to manufacture soap and children's toys for their cartoon character. Some company in Indonesia may be allowed to manufacture a cheaper version of their product, with the same brand. Imagine having to deal with grey imports. You make the high quality originals, and some wiseguy imports a bunch of stuff with the same brand from a third-world country. What would you do then?
  10. Ask for previous valuation reports from their side. They would have come up with the figure they are asking for from somewhere. Of course, their valuations are always sunny. Didn't your teacher ever tell you that the grass is always greener on your side? Valuers seem to make that happen.
  11. Get details of any claims, potential litigation, on-going litigation, and past litigation. For all you know, the IP you are eyeing is the subject matter of a highly contentious claim. The dying company could have copied it from somewhere. It could be vitiated in a court case somewhere, in which case it would be worth nothing. 
  12. Interview their IP manager, if possible. Find out what their strategy was for their IP and why their IP did not save their company. They will probably blame it on something: Lack of funding, lack of marketing, slow market adoption, litigation. Listen and nod. Go back and sort out the bullshit from the truth. 
  13. Talk to people in industry about the potential value of the IP that you're getting. You can't name names, and you can't mention who you are dealing with. You can't mention what you are acquiring, because the deal might fall through. But you can ask what direction the industry is headed, and whether similar IP has been a boon or a bane. You can't say anything yet you must say something, otherwise how else can you get information? Go general with outsiders and drill deep with your team. You might need to tie up your team members with NDA's as well, just in case somebody leaks. 
  14. Evaluate how the IP might be further developed. The dying company may have had limited funds, or bad management. Or some other inexplicable problem that they didn't appreciate until too late and they are too embarassed to tell you. They want to sell the IP to you, but before you bite, think how it can be further developed. Is the R&D department of your company positive that the area of the IP is full of potential development? Does the market show an appreciation of the type of product the IP is about? Does the IP represent only a prologue of a wonderful story? 
That's it for now. I could update this checklist sometime in the future, if there are interested readers. But you guys have to leave me a message in the comments so that I know that there is intelligent life out there in the universe.


Further Reading.

The following links may be of interest to you. They are all about checklists in IP.
Thanks for reading.
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